- Date : 02/12/2021
- Read: 4 mins
These factors could determine whether your business loan is approved or rejected.
A business loan can be an excellent way to bring in more funds to your company. It can help you expand operations, hire new people, buy the latest equipment, and put all your big plans into action. There are a lot of options for loans these days.
You can apply for a loan from a bank or a non-banking financial company (NBFC). You can also avail of a government business loan. Some lenders even offer collateral-free business loans. Generally, lenders look at two key aspects when approving a business loan, your ability to repay when considering your income and expenses and your intent to repay, which they gather through your credit score and timely credit card payments.
However, your eligibility for a business loan can differ depending on the lender. Here are some factors to bear in mind when applying so that the chances of rejection are minimised.
- Incomplete paperwork: There are several factors banks consider before granting a loan to a business. Moreover, different lenders can have a specific set of documents required for business loans. Make sure you find out what these are and submit all documents in time. Incorrect documentation or missing paperwork can result in your loan being rejected.
- Low loan amount: For most lenders, getting a high-value business loan is a massive success as it allows them to earn more money after levying the business loan interest rate. However, lenders still are willing to work with businesses that seek low loan amounts. There is a misconception that if you apply for a low-value loan, the lender may reject it or at the very least take time in approving your request. This is not the case; after all, a small loan amount means lower exposure and hence lower risk for the lender.
- Weak business cash flow: If your business’s cash flow is weak or negative, the lender would likely reject your loan. A steady cash flow indicates your ability to repay the loan, so it makes the lender more confident. The upshot is that unless you are running a successful business with a positive cash flow, getting a business loan may be a problem.
- Existing debt: Having any pending debt affects your business’s credit score and lowers the chances of approval. It also presents you as a financially weak candidate since it highlights your dependence on debt.
- High-risk factors: If your business is too risky (say, if it’s introducing a new idea in the market), the lender may be wary of giving you money. Although there are many start-up business loans available in the market to promote new businesses, it may help to present a thorough business plan mapping all risks to instil more confidence in the lender.
How to improve your chances of getting a business loan approved
- Be thorough: It helps to check all rules of business loan eligibility before you apply for a loan. Review all documents to be sure that the information is accurate. This will eliminate delays and avoidable rejections.
- Have collateral ready: Most lenders ask for collateral when offering a business loan. Instead of being caught off guard, be prepared and keep a financial asset list ready that can be used as collateral.
- Build a strong foundation: As long as you have a good credit score and a steady cash flow, with all documents in place, you have little to worry about. However, if these basics are not in line, you would not be able to avail of a business loan so easily. So, avoid any gaps or mistakes in your application and make sure it is as perfect as possible.
Paying close attention to these business loan factors will not only help you receive a lower rate of interest or processing fee in the future but will also keep you in good stead when applying for a corporate loan or a government business loan. So, do keep them in mind.